Spano Advisory Services, Inc.

Frequently Asked Questions

How do I reach the IRS?
Whatís the difference between a tax exemption and a tax deduction?
What is the standard deduction?
What are the rules for miscellaneous deductions?
How does my filing status affect tax deductions, credits and rates?
What are estate taxes?
What is the difference between a tax-free and tax-deferred investment?
What are capital gains taxes?
I have started my own business. Can I just wait until the end of the year to start paying taxes?
How long does the IRS have to audit my return?
What is an IRS automated adjustment?
What is the Taxpayer Bill of Rights?

How do I reach the IRS?

To reach the Internal Revenue Service, call (800) TAX-1040. You can also visit the IRS Web site. If you're trying to resolve a problem that has not been resolved through the usual IRS channels, contact the Problem Resolution Program office. Each IRS district and service center has a PRP office and a local Taxpayer Advocate, who is responsible for representing the taxpayers' point-of-view within the IRS. You can call PRP at (877) 777-4778. However, due to numerous reorganizations of the IRS, it is very difficult to be able to speak to an individual at the IRS and is almost impossible to get a prompt answer and resolution to your problems.

Whatís the difference between a tax exemption and a tax deduction?

Two primary types of tax breaks that can reduce the taxable income of most Americans are tax exemptions and tax deductions. One type of tax break available to all taxpayers is an exemption, a specific amount ($2,800 in 2000) that can be subtracted from your taxable income. If youíre single and have no children, you are allowed one personal exemption. If youíre married and file a joint return, you and your spouse are each entitled to a personal exemption. You also get an additional exemption for each child you have. If you earn a very high income, your exemptions may be phased out or eliminated. The other type of tax break is a deduction. Deductions are specific expenses that the government allows you to subtract from your income, thus reducing the amount of tax you pay. Uncle Sam offers deductions for certain types of behavior or situations. For instance, to encourage people to buy homes, the government allows taxpayers to deduct the interest they pay on their mortgage.

What is the standard deduction?

Most taxpayers can take advantage of the deductions allowed by the Internal Revenue Service in one of two ways. They can either itemize their deductions by reporting specific deductible items such as mortgage interest and property tax, or they can take the standard deduction. The amount of the standard deduction rises each year to keep pace with inflation. For 2000 tax returns, the standard deduction for a single person is $4,400. For a married couple filing a joint return, the 2000 standard deduction is $7,350.

What are the rules for miscellaneous deductions?

Deductions for job-hunting expenses, accountantsí fees, professional magazines, uniforms, union dues, and a variety of other items are classified as miscellaneous deductions. Write-offs for these items are limited; you can only deduct the portion of these costs that exceed 2% of your adjusted gross income.

How does my filing status affect tax deductions, credits and rates?

Your filing status is an important factor in determining whether you are required to file, the amount of your standard deduction, and the amount of your tax liability. Your filing status also determines whether you can take certain deductions and credits. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. Different tax rates apply to different filing statuses. To determine your tax liability, use the column that applies to your filing status in the Tax Table or Tax Rate Schedule in the IRS forms package. The 2001 standard deductions are: Single, $4,550; Head of Household, $6,650; Married Filing Jointly or Qualifying Widow(er), $7,600; and Married Filing Separately, $3,800.

What are estate taxes?

Estate taxes are taxes based on the value of the estate you leave when you die. Estates valued at more than $675,000 for 2001 are subject to the federal estate tax. Some states use lower limits, but other states charge no estate taxes at all. Any estate taxes that are due are usually paid by the estate itself. This sets them apart from inheritance taxes, which are state taxes that your heirs may be required to pay on the property they inherit. Note that the recently enacted Economic and Tax Relief Reconciliation Act of 2001 will ultimately repeal the estate tax in 2010 and diminish its effect each year until then. Consult IRS Publication 950, Introduction to Estate and Gift Taxes, for more information. You can download it from the IRS Web site or order by calling 1-800-TAX-FORM (829-3676).

What is the difference between a tax-free and tax-deferred investment?

Many investors confuse the term "tax-free" with "tax-deferred." Thereís a huge difference between the two. When you make a tax-free investment, the annual income and any profit you make when you sell will not be taxed -- ever. When you make a tax-deferred investment, you will eventually owe tax on the profit the investment generates. However, these taxes can be put off to some future date. A good example of a tax-free investment is a municipal bond. Interest payments from a muni bond are never subject to federal income taxes (capital gains are taxable), and theyíre also free from state taxes if you live in the state where the bond was issued. Perhaps the best example of a tax-deferred investment is an Individual Retirement Account (IRA). The investments you make inside the account generate taxable income, but you wonít have to pay the taxes until you start making withdrawals in retirement.

What are capital gains taxes?

Just about any time you sell an investment for a profit -- be it stocks, bonds, real estate, whatever -- you will owe taxes on any gains realized. These are called capital gains taxes. No one likes to pay taxes. But if itís any consolation, remember that you donít have to pay capital gains taxes until the asset is actually sold. So, in effect, your taxes are being deferred while your personal wealth is growing.
In an effort to encourage investment, Congress has reduced the tax rates on capital gains. For most types of investments held for 12 months or more, capital gains are taxed at 20% for taxpayers in the 28% income tax bracket or above, and just 10% for those in the 15% bracket. The Taxpayer Relief Act of 1997 also allows most couples who file a joint return to keep up to $500,000 of the resale profit on their home tax-free and lets single filers keep up to $250,000. An accountant, tax planner or similar professional can help you design an investment program that will minimize taxes.

I have started my own business. Can I just wait until the end of the year to start paying taxes?

If you are self-employed -- regardless of whether you own your own business, or if you simply moonlight to earn extra money -- you will probably have to pay taxes to the Internal Revenue Service on a quarterly basis rather than annually. If youíre self-employed, the companies you do work for probably will not withhold taxes from their payments to you. But you canít simply wait until the end of the year to pay the IRS. Instead, you will have to pay income tax quarterly. Call the IRS and request Publication 505, Tax Withholding and Estimated Tax. You must also be sure to pay enough self-employment tax. For details get a copy of Publication 533, Self-employment Tax. Even if youíre desperately afraid of tax-related reading, call for these booklets and attempt to read them. You can download them from the IRS Web site or order by calling 1-800-TAX-FORM (829-3676).

How long does the IRS have to audit my return?

The Internal Revenue Service can audit your income tax record for any reason within three years after the return is filed. As a result, you need to keep virtually all of the records used to complete your return for the same amount of time. Most tax-related documents, though, should be kept for at least seven years. Thatís because, if the IRS believes you have underreported your income by 25% or more, it has up to six years to launch an audit. Thereís no statute of limitations if you file a false return or donít file at all. If thatís the case, the IRS can literally haunt you into the grave and take any money you owe out of the estate you leave behind.

What is an IRS automated adjustment?

If the Internal Revenue Service thinks your income tax return is inaccurate but a full-blown audit isnít required, it may send you an automated adjustment notice. The automated adjustment notice will explain where the IRS thinks you messed up and will tell you how much extra you owe. You have the right to appeal, but you must do so within 60 days.

What is the Taxpayer Bill of Rights?

Publication 1, Your Rights as a Taxpayer, is often called the "Taxpayer Bill of Rights" because it spells out how the IRS must conduct an audit and explains the rights of a taxpayer whose return is being examined. Those rights include the ability to have representation at an IRS hearing and the right to end an interview in order to consult a tax expert. You also have the right to record an interview, propose an installment payment program, or appeal the findings of an audit or the placement of a tax lien against your property. The Taxpayer Bill of Rights also allows you to get the help of an IRS ombudsman or "problem resolution officer" to prevent the agency from seizing your property, garnishing your wages or forcing you into bankruptcy. You can download it from the IRS Web site or order by calling 1-800-TAX-FORM (829-3676).